Sorting Out Future Business Tax Changes

OCEAN CITY – A few weeks back, we looked at some questions regarding tax changes enacted in recent years that take effect in 2011. Here are some more commonly heard questions about the new changes and how they may affect you and your business.

(BOLD QUESTION)What about the small-business tax incentives enacted over the past couple of years? Are there any worth taking advantage of?

Absolutely. The most significant are the ones governing the depreciation of certain types of property. For the past three years, you’ve generally been able to deduct up to 100% of equipment purchases (up to a total of $250,000) and claim the deductions in the current tax year rather than having to depreciate the asset over time, and in 2009 a so-called "bonus depreciation" rule permitted the deduction of up to 50% of the cost of the purchases of qualified equipment with no limits on the current-year tax savings.

One proposal approved by the House would extend the bonus depreciation through 2010. Another, more ambitious proposal by the Obama Administration would allow business owners to deduct and claim up to 100% with no limits on any qualified equipment expenditures made between Sept. 8, 2010, and Dec. 31, 2011. Yet there’s also a possibility that all of these provisions could go away. "Probably the best approach you can take is to tentatively plan on acquiring fixed assets and putting them into service by the end of the year," says Vinay Navani, a tax advisor with Wilkin & Guttenplan, a New Jersey accounting firm.

That way if the more ambitious proposal passes by year-end, you can always postpone the purchase to 2011 if that works better in your budget, but if Congress balks and does nothing, at least you’ll be in position to take advantage of the $250,000 deduction before it sunsets at the end of the calendar year.

(BOLD QUESTION)And what about hiring incentives?

The Hiring Incentives to Restore Employment (HIRE) Act, signed by President Obama in March, offers two tax credits to businesses that hire unemployed workers before Jan. 1, 2011.

First, you generally get a payroll tax exemption on your share of the Social Security taxes on wages paid to those workers from March 19 through Dec. 31, 2010. Second, if the employees are retained for at least a year, you receive a tax credit of as much as $1,000 per worker. In order for employees to qualify, they must have been unemployed or worked fewer than 40 hours during the 60 days prior to their start date and begun work for you after Feb. 3, 2010.

"Since this year is almost over, you’ll increasingly get less bang for your buck on the payroll deduction, and the credit is only $1,000," says Navani. "Still, for businesses with a lot of employees, it’s at least something."

(BOLD QUESTION)If I’m planning to sell my business next year, how will the rising taxes affect any profit from the sale?

The proceeds from the profitable sale of closely held businesses are usually taxed at capital gains rates, which are set to rise to 20% from 15%. If you already have a deal on the table, it might be worth giving the buyer a discount to move up the date. If your agreement includes installment payments, you can generally elect to pay all the taxes upfront in 2010 at the lower rate even though you’ll be receiving the checks over successive years. The key is sitting down with a trusted tax advisor to run the calculations and structure the payments ahead of time. "But, again, ultimately you’re looking to maximize the cash that goes in the seller’s pocket, and that’s driven by a lot of things — taxes being just one of them," says Navani.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)